Monday, October 10, 2016

India's first MPC meeting takeaways

India's newly minted Monetary Policy Committee (MPC) had its first meeting last week. The interest rate cut was surprising. I'll not delve into the technical merits of the decision. Instead I have three observations.

1. The unanimity of the vote (6-0) at a time when the case for a cut is at least debatable and was definitely not unanimously expected is disturbing. Prima facie, it gives rise to the feeling that the MPC's objective function is skewed more towards growth, with attendant risks of being behind the curve.

2. It may have been prudent tactically to refrain from a rate cut now, especially in the immediate aftermath of the exit of a hawkish Governor and the recent history of constant tussle with the Government on easing. In fact, just to stay the course would have been a good signal to reinforce perceptions about the central bank's autonomy, leave aside inflation fighting credentials.

3. A rate cut now reduces the RBI's room to manoeuvre as the Budget quarter approaches. The pressure from the Government to oblige with another cut closer to the Budget will be intense. In response, another rate cut, following this one, will be viewed by the market participants as further proof of the ascendancy of North Block.

In conclusion, as a statement of intent from a brand new institution to an audience who live on reading the tea leaves, this decision may have the potential of adversely unhinging a few expectations.